FL Details

Foot Locker Inc (NYSE: FL) is a New York-based specialty athletic retailer. It holds a portfolio of brands that comprises Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, atmos, WSS, Footaction, and Sidestep. The company has around 3,000 retail stores spread across 28 countries viz; North America, Europe, Asia, Australia, and New Zealand.

Healthy Performance in Q2FY21 (For the Second Quarter Ended 31 July 2021)

• The company has delivered healthy growth in net income to $430 million for the 13 weeks ended 31 July 2021, against a net income of $45 million in the PCP.
• Total sales grew by 9.5% to $2,275 million compared with sales of $2,077 million in the PCP. However, without considering the impact of foreign exchange rate fluctuations, the company reported a 7.3% growth in total sales in Q2FY21.
• The strong performance during the quarter reflects the healthy performance of its women's and kids' footwear business as well as the broad demand for its apparel and accessories offerings, which combined with the more limited promotional activity, resulted in the outstanding top as well as bottom line results.  

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Healthy Growth in Quarterly Dividend

The board of directors of the company, on 16 August 2021, declared a quarterly cash dividend of $0.30 per share on its common stock, which reflects a healthy growth of $0.10 per share or 50%. The payment date of the dividend was on 29^th October 2021. This dividend payout shows the company’s sustained emphasis on providing meaningful cash returns to its shareholders, as well as financing substantial investments in strategic growth opportunities.

Expanding through Inorganic Route

The company, on 1 November 2021, has completed the acquisition of atmos, a digitally-led, premium, global retailer headquartered in Japan, through certain subsidiaries for a consideration of $360 Mn. The acquisition of atmos will not only accelerate its global reach in the Asia-Pacific market but also provide the company with a critical entry point in Japan and would also benefitting from immediate scale.

Further, in the release dated 20^th September 2021, the company has completed the acquisition of Eurostar, Inc. ("WSS"), a U.S.-based athletic footwear and apparel retailer at a cash consideration of $750 million.

Key Metrics

The ROE increased significantly to 13.7% in July 2021 compared to 1.9% in August 2020. Moreover, the company’s current ratio increased to 1.89x in July 2021 from 1.69x in August 2020, and also higher than the industry median of 1.46x. The increase in the current ratio indicates that the company possesses better capabilities to meet short-term obligations.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 56.95% of the total shareholding while the top four constitute the maximum holding. Notably, Vesa Equity Investment S.à r.l. and The Vanguard Group, Inc. are holding a maximum stake in the company at 12.28% and 10.27%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company is exposed to the risk of competitive intensity as the retail athletic footwear and apparel business is highly competitive. Also, the change in the relationship with any of the key suppliers or the unavailability of important products at competitive prices might impact the financial health.

Outlook

The company’s financial position remained healthy and its total cash position, net of debt, stood at $1,733 million as of 31 July 2021, up by $484 million compared to the PCP. Its capital allocation policy is largely inclined towards investing in growth opportunities along with returning cash to shareholders by way of quarterly dividend and share repurchase.

Further, the company is on an investment mode as reflected from its $36 million investment in its store fleet, digital capabilities, supply chain, and other infrastructure during the second quarter of 2021.

Meanwhile, the management provided a cautiously optimistic outlook for the back half of 2021. Given the uncertain environment amid COVID-19, the management maintains a close watch on the business, including temporary store closures and supply chain challenges, while also remaining focused on expense management.

Valuation Methodology: Price/Cash Flow Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The company has delivered 9-month and one-year return of ~+8.06% and ~+31.39%, respectively. The stock is trading lower than the average price of the 52-week low-high range for the stock at $36.09-$66.71, respectively, which indicates a good opportunity for accumulation.

The stock has been valued using Price/Cash Flow multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average Price/Cash Flow multiple (NTM basis), considering its robust performance in Q2FY21, investments in growth initiatives, and healthy liquidity position.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the closing market price of US$49.06 per share, up by 1.09% as of 2^nd November 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices